Complementary inputs, outsourcing and vertical integration: Price versus quantity competition

Abstract

We compare the effects of price and quantity competition in an industry with complementary inputs, outsourcing and a vertically integrated firm where vertical integration occurs between a final goods producer and a subset of input suppliers. The profit of the integrated firm and the industry profit are higher under Bertrand competition, the profit of the non-integrated firm is higher under Bertrand competition for high product differentiation, and consumer surplus and welfare are higher under Bertrand competition for low product differentiation. Further, no market foreclosure can be the preferred choice of the vertically integrated firm for any degree of product differentiation.